In our previous articles, we read about penny stocks and high beta stocks. Both these variants are highly volatile, making them risky avenues. While these have the potential to generate high returns (remember risk-return trade-off), wouldn’t you also invest in stocks that are relatively less risky and offer more or less stable returns? If yes, blue chip stocks would interest you. Read on to learn more.
The article covers:
What are blue chip stocks?
Stocks issued by blue chip companies are called blue chip stocks. These are relatively less volatile and command high valuations.
What are blue chip companies?
These are large, well-established, and reputed companies. Blue chip companies are financially sound and mature entities having ample monetary resources to fend off tough times and pay regular dividends. Blue chip companies are market leaders in their respective sectors and hence are very popular among investors.
Origin of the term ‘blue chip’
The term ‘blue chip’ is derived from the game of poker, in which blue chips are the most valuable chips.
Salient features of blue chip stocks
Following are the characteristics of blue chip stocks:
- Steady returns: most blue chip companies have a track record of paying consistent dividends to their investors
- Safer alternatives: blue chip companies are well-established entities and hence stocks issues by them are considered to be relatively safer
- High credibility: blue chip companies boast dependable capital/financial resources such that they can meet their financial obligations quite easily. This makes them creditworthy
- Low risk: although blue chip companies are mature entities that have survived market cycles and economic downturns, they are not entirely insulated against them
- Steady growth: blue chip companies have been in the market for a long time. Ergo, having reached a saturation point, they grow steadily and not aggressively
- Resilient entities: since blue chip stocks are market leaders, these are considered to be resilient during trying economic times
- Expensive stocks: due to their repute in the market, stellar performance, and strong financials, blue chip stocks are usually priced on the higher side
- Constituents of benchmark indices: many blue chip companies form part of benchmark indices such as Nifty 50, Nifty 100, and Sensex
- Low volatility: since blue chip stocks are offered by well-established companies, their stocks are not highly influenced by market volatility and so don’t fluctuate wildly
- Strong cash flow: blue chip companies often have a strong cash flow. However, this doesn’t mean the cash flow has to be positive. A negative cash flow can mean good when the company uses it for productive purposes such as funding expansion, which is a good sign too
- Long-term investment: blue chip stocks are ideal for investors having a long-term horizon, preferably 5 to 7 yrs
Should you go all-out when investing in blue chip stocks?
Although blue chip companies are strong and can survive market challenges and cycles, recession and other economic downturns can hit them just as bad. Ergo, it is best to diversify your portfolio by adding shares other than blue chip stocks. These include smallcap stocks and midcap stocks. Here’s a brief guide on the market cap of stocks.
In addition, you can also consider investing in ETFs, securities that are traded on bourses and designed to closely match a stock market index. When picking an ETF, consider this 4-point checklist to choose the one that suits your portfolio the best. You can also use Ticketape’s Pre-built Screens to discover ETFs based on your favourite metrics. On identifying the ETFs you want to invest in, you can buy them on Tickertape itself. For greater convenience, use basket and transactions features on Tickertape to buy multiple ETFs in one go.
Other than an ETF, you can also consider adding debt instruments and fixed-income avenues such as a fixed deposit to your portfolio. A fixed deposit is offered by post offices, banks, and NBFCs too. When looking for an FD, don’t just pick the one with a high interest rate, instead also look for those having the highest CRISIL rating as they are relatively safer.